Taps Coogan – June 17th, 2020

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David Rosenberg of Rosenberg Research recently spoke with WealthTrack’s Consuelo Mack and details exactly what is wrong with the post-Financial Crisis economy. He also explains the futility of relying exclusively on monetary policy and transfer-payment-style stimulus to fuel the recovery.

 

Some excerpts from David Rosenberg:

“… We had a phenomenal stock market that was built on financial engineering in the sense that it was the biggest debt-for-equity swap of all time. Instead of the debt being issued to finance capital expenditure for productivity purposes, it went to buy back stock…”

“(Unemployment) was at a 50 year low and (it) got as low as 3.5%. But, take a look at the quality of the jobs that were created (over the last decade). Most of the jobs that were created this cycle were not in physics or engineering or the sciences. It was is in entertainment, it was in leisure, it was in hotels, it was in theme parks. What did we just find out? We found out that the non-essential economy had to be shut down. But who knew that the non-essential part of the economy was 80% of GDP? I call it the non-essential economy… Everybody’s was always wondering ‘How is it that we’re not getting any wage growth from the economy with the unemployment rate going down so much?’ Well the jobs were being created in the low-wage sectors of the economy…” 

“(Productivity growth has been so low) because there was no capital deepening this cycle. Not only was it the weakest cycle ever for GDP growth, it was the weakest cycle by far for capital expenditure… The real bull market was in financial engineering…”

“People spend their organic wages and salary that they get from work differently than they spend from a government handout, completely different savings rate and multiplier impact. What do people spend their government handouts on? Mostly on food, rent, pharmaceuticals, the necessities… They’re going to be saving a very big chunk of the stimulus checks. It’s not going to all go into spending… This is not FDR stimulus of the 1930s. The New Deal was a funky deal, but it paid people to go to work. We built the Golden Gate Bridge, the Triborough Bridge, the Lincoln Tunnel, extended Route 66, the Hoover Dam. We’re paying people right now not to work. That has a very different multiplier impact, a very small one, on the economy. So when we talk about the big stimulus, it’s not really stimulus at all. These are government checks to help people stay intact…”

“The Fed has, in this process, probed the outer limits of monetary policy by multiples. The Fed’s balance sheet has expanded by $3 trillion just in the past couple months… The Fed did more in three months that it did in seven years from 2008 through 2014… We went into this with massively over-leveraged corporate balance sheets. Of course, now the bad actors are getting bailed out again… Not only is the household sector going to be treating its balance sheet with far greater care in the future, but so is the corporate sector. You’re going to be seeing fewer buybacks. You’re going to be seeing more cash on the balance sheet… I think that there are going to be a lot of very profound changes taking place over the course of the next several years and the theme is going to be one of frugality…”

“FDR never ran a deficit over 7.5% of GDP… That was the highest percent of the depression. We’re going to clear 20% this year…”

At this point, it aught to be pretty broadly understood that the US and other developed economies have a very hard road ahead. Mr. Rosenberg puts a fine point on that concept, as only he can. That being said, even Mr. Rosenberg acknowledges that there is going to be a recovery. It could even a strong one.

This is not the first time that the US has faced massive economic and/or social challenges and it won’t be the last. While today’s witches’ brew of problems is particularly ominous, finally confronting these challenges (endless trade deficits, budget deficits, bureaucratic over-reach and over-regulation, over-indebtedness, wealth divide, etc…) provides the opportunity for meaningfully structural reform and genuine pro-growth initiatives. Several years of frugality might not be fun, but it is probably just what the doctor ordered. Let’s hope that it extends to the broader government sector too.

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